Amazon (AMZN) reported third-quarter results that may turn out to be the biggest disappointment of earnings season so far. The online retailer reported earnings per share of 14 cents, which is 37 cents less than the same quarter last year (a 73% decline in net income) and also well below expectations. Fourth-quarter guidance also indicates that the company expects operating income to be between a $200 million loss and a $250 million gain, a huge range. We think the rollout of its suite of Kindles at ultra-low (and perhaps money-losing) prices is the primary reason behind the wide profit expectations.
But there was also good news that came out of the Amazon’s report. Net sales increased 44% (39% excluding currency impact) compared to the same period last year. The company also highlighted its biggest order day, September 28, which included the release of four Kindles, including the Kindle Fire and the Kindle Touch 3G, with strong pre-orders, which bodes well for the upcoming holiday season. International sales were also strong in the third quarter, up 44% from the previous year (including currency impact), and the firm continues to develop its presence outside North America, launching Amazon.es (a Spanish language website) and the French Kindle store this quarter. Amazon also announced additional licensing agreements to add PBS and Twentieth Century Fox content to their streaming video library. As far as demand goes, it couldn’t be better, and we think such top-line performance at Amazon supports our view that the US economy remains resilient.
In after-hours trading, the price of the stock fell sharply to levels not seen since the stock dipped in the middle of August. We reiterate our fair value of $234. At current levels, shares of Amazon are trading at the low end of our fair value and may represent and opportunity for investors. We would consider adding Amazon to our Best Ideas List if its share price falls to near $175.